KKR is to team up with an Irish government fund to lend to housebuilders, in a bet by the private equity manager that Ireland’s recovery has further to run a year and a half after the country emerged from its bailout.

The Ireland Strategic Investment Fund and KKR’s credit arm will invest a combined €500m in Activate Capital, a lender that will test demand from residential developers to increase housing supply.

Despite overbuilding before its 2008 bust, Ireland’s property market has been showing signs of a housing shortage, in part because developers lack capital to build more homes.

Last year Ireland built about 9,000 homes, compared with a house construction rate in the long run of approximately 30,000 a year — and 90,000 a year during the bubble.

While house prices remain more than a third below the pre-crisis peak, they increased 10 per cent in the year to June, Ireland’s Central Statistics Office said on Monday.

Prices in Dublin’s commuter belt in particular rose a tenth on average in just six months from the start of 2015, according to Daft.ie, a property website.

Activate would be able to finance building more than 11,000 new homes, ISIF and KKR said.

The business would be “predominantly urban-centred” in its lending to developers, said Robert Gallagher, head of KKR Credit in Ireland.

“They’re undercapitalised but not under-ambitious in terms of getting back into the business,” Mr Gallagher, a former Ulster Bank executive, added.

KKR began its push into Ireland in late 2013, acquiring Avoca, a local credit manager, and has been looking for investment opportunities in the country.

“This one is interesting as it’s a hybrid of credit and real estate,” Johannes Huth, head of KKR’s Europe, Middle East, and Africa operations, said of Activate.

“Let’s try to find a way where we can get more housing built without necessarily going through the traditional channels,” he added.

The Irish central bank earlier this year set loan to income caps on new mortgage borrowing to shore up the financial stability of banks.

Ireland’s National Pensions Reserve Fund, a Celtic Tiger-era sovereign wealth fund, reincarnated last year as the more modest ISIF, will provide the majority of capital to Activate.

With just over €7bn to invest, the ISIF has a mandate to foster economic activity within Ireland and to deliver returns above the average cost of the government’s debt.

The ISIF also owns a 14 per cent stake in the Bank of Ireland, and 99 per cent of Allied Irish Banks — legacies of the NPRF’s use for recapitalising lenders after Ireland’s property bubble popped.